GBP USD Breaks Through 1.36 Resistance Level

The pound broke through the 1.36 resistance level against the dollar on Tuesday, supported by expectations that the Bank of England (BoE) will raise interest rates further.

The UK currency floated around its highest level since 4 November when it plummeted in value after the BoE shocked market participants by keeping interest rates on hold at a historic low.

Investors have increased bets on the central bank raising interest rates as early as February after a surprise hike last month by 15 basis points to 0.25%.

Powell pledges to prevent higher inflation

GBP USD also gained some support from signs of dollar weakness, despite mounting expectations that the Federal Reserve will raise interest rates sooner than initially expected.

However, the US currency managed to edge higher on Tuesday amid a bout of market volatility that dampened demand for riskier currencies and as investors awaited Federal Reserve Chair Jerome Powell’s testimony to the Senate.

In his prepared testimony, Powell explained that Covid-19 triggered the fastest and deepest downturn in the US economy since records began. But, stimulus packages, Fed action, the vaccine rollout and “American resilience” absorbed the pandemic’s economic blow and sparked a historically strong recovery.

Powell said: “Today the economy is expanding at its fastest pace in many years, and the labour market is strong.”

Powell also said the US central bank will implement measures to curb higher inflation, while also supporting jobs, after the economic recovery prompted the highest inflation rate since the early 1980s.

“We know that high inflation exacts a toll, particularly for those less able to meet the higher costs of essentials like food, housing, and transportation. We are strongly committed to achieving our statutory goals of maximum employment and price stability. We will use our tools to support the economy and a strong labour market and to prevent higher inflation from becoming entrenched.”

“We can begin to see that the post-pandemic economy is likely to be different in some respects. The pursuit of our goals will need to take these differences into account. To that end, monetary policy must take a broad and forward-looking view, keeping pace with an ever-evolving economy.”

Fed officials have predicted that interest rates will rise three times this year, with some Wall Street banks predicting borrowing costs could be hiked as many as four times.

Looking ahead

US inflation data is in focus today, with the headline consumer price index expected to get even hotter.

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